Goldcorp: Bearish <b>Gold Prices</b> But Bullish Production - Seeking Alpha |
| Goldcorp: Bearish <b>Gold Prices</b> But Bullish Production - Seeking Alpha Posted: 18 Mar 2014 04:03 AM PDT Summary
The top two gold predictors are bearish on the outlook of gold prices in the year 2014 so I thought of analyzing Goldcorp Inc. (GG) the biggest gold miner by market value. Goldcorp Inc. operates as a gold producer involved in the exploration, development, and acquisition of metal properties in Canada, the United States, Mexico, and Central and South America. The company generated 78.3% of its total revenues for FY 2013 from its operations related to gold as shown in the pie chart below. This makes the company's financial performance and position heavily dependent upon gold market. Source: GG Management Discussion and Analysis Therefore, I will begin the analysis by giving an overview of the gold market and its outlook. Afterwards I will discuss Goldcorp Inc.'s initiatives to improve its performance and strengthen its position in the coming years. The Gold Market and Its Outlook Gold displayed its most preeminent start to a year in 2014 since 1983 as shown in the chart below. (click to enlarge) Source: Y charts You can see from the chart above that the gold price in USD increased 10.86% YTD and that also contributed to the increase of Goldcorp's YTD share price by 28.38%. But the question is whether or not these gains in gold price and the company's share price will continue till the end of 2014. I will discuss the answer to the aforementioned question later on. The rise in gold price is expected to drop in the coming months according to forecasts by various analysts. Morgan Stanley recently lowered its gold price forecasts for 2014 considering the effect of the U.S. Federal Reserve's reduction of its stimulus along with rising regulatory pressure on investment banks to reduce their commodity operations. Hence, the bank forecasted the average gold price to fall around $1160/oz in 2014. Some support to the gold prices will come from physical demand. Gold stored at Comex, the prominent bullion storage house for futures traders, has reached a low level and there are now more than 112 owners per physical ounce of gold stored in Comex's vaults. This figure also accounts for paper claims to gold such as derivative contracts. This is a significant figure along with high physical gold demand from China. Additionally, investors appear more willing to consider precious metals as an investment option than they did in 2013 but this will minutely offset the decline in prices. Other banks are also anticipating a decline in gold prices as shown in the table below. As a result, a cost-efficient gold miner will survive in this lower price environment while others will encounter significant challenges. Therefore, I will discuss the key matrices of Goldcorp with respect to cost analysis under the following heading. Cost Analysis, Saving Initiatives, and Targets Over the past years Goldcorp has been altering its mine plans, cutting spending, and disposing assets in order to reduce costs and focus on the most profitable production. Now those efforts have begun paying off. The company reported a fall in all-in sustaining costs by an ounce in Q4 FY 2013 as shown in the chart below. The company has projected $950-$1000 in all-in sustaining costs for FY 2014 down from $1031 recorded in FY 2013. Source: BMO Metals and Mining Conference The company will benefit from facility expansion, cost control, and productivity improvement measures and has guidance for cash cost $/oz decline in FY 2014 in comparison to FY 2013 as shown in the table below. The company has witnessed noteworthy capital costs in FY 2013 and the previous recent years to finance its growth projects. These capital costs are likely to decrease in the future, as growth projects start production. The decline in capital costs is likely to strengthen the company's free cash flows. (click to enlarge) Source: CIBC 17th Annual Whistler Investor Conference The company is continuing to deliver on its cost-cutting initiatives so it should be able to drive earnings growth even without an increase in metal prices. Goldcorp's projects that are expected to start production in the upcoming years have lower costs and this will help the company to improve its costs structure and strengthen its cash flows. I will further discuss the project pipeline and production under the following heading. Project Pipeline and Production (click to enlarge) Source: CIBC 17th Annual Whistler Investor Conference You can see from the diagram above that the company has a strong pipeline of projects and projects under construction in FY 2014. As a result, the company is moving ahead well with its development projects and is on-track to accomplishing its long-term production targets. Along with providing a positive production guidance for 2014 Goldcorp secured Zacks Rank #3 (HOLD) for its stock. The company's growth drivers are linked to its array of development and exploration projects. The company has an impressive lineup of such projects and presumes its gold production will rise 13%-18% year-over-year from 3 million in 2013 to 3.15 million ounces in 2014. The Cerro Negro project is anticipated to have its first production by mid-2014 with an estimated production of 130,000-180,000 ounces. Cochenour is another project that is forecasted to commence production in 2014, six months ahead of schedule. Capital costs for Cochenour are also estimated to be $500 million, around $40 million below previous estimates. The third project expected to begin production in 2014 is Éléonore that is planned to start production in Q4 2014. This will make a contribution of 40,000-60,000 ounces towards total production in 2014 as anticipated so far. The following diagram states the company's production guidance for the coming years that is forecasted to increase until FY 2016. Source: CIBC 17th Annual Whistler Investor Conference This forecast rise in the company's production is largely due to the Éléonore and Cerro Negro mines that will start production in FY 2014 along with the rise in production in the Peñasquito and Pueblo Viejo mines. This will put the company in a leading position with respect to production growth in comparison to its industry peers as shown in the chart below. Source: Goldcorp Offer for Osisko In addition to these low-cost projects in the pipeline that will boost the company's metal production and bottom line in the coming years, the company is also aiming for further strategic moves. Further Strategic Moves Mining companies are striving to optimize their asset holdings for the current price environment through asset sales as well as acquisitions. The declining gold price level represents huge opportunities and smart companies are taking advantage of them. You can anticipate these trends among miners to last at least until prices rebound more strongly. But until then, many companies will combat for their financial lives and investors who discover how to take advantage of their more susceptible peers will gain. Goldcorp's ongoing effort to buy Osisko Mining reflects the company's strategy of acquiring promising long-term assets inexpensively. Osisko's key asset is the low-cost Canadian Malartic gold mine in northwest Quebec, one of the largest precious-metal mines in Canada, with 10.1 million ounces of gold reserves. Canadian Malartic is likely to turn into one of Goldcorp's prominent mines in terms of free cash flow, production, and net asset value as it has attributes to bring in solid returns even at low gold prices. On the other hand, Goldcorp is selling its stake in Primero Mining Corp (PPP), and this will allow the company to gather proceeds of about $202million (C$ 224 million). Goldcorp has recently entered into an agreement to dispose its total holdings of Primero Mining, a Canadian-based gold and silver producer. The sale of Primero's shares is seen as positive for Goldcorp. The sale will strengthen the company's balance sheet and can provide potential finance for its proposal on Osisko Mining (OSK) or support the company's capex obligations. The sale will also help the company to reduce its net debt/EBITDA ratio that would decrease to 0.9x. Goldcorp has three major projects approaching completion and although it has put its proposal to acquire Osisko Mining on hold for now with the potential completion of the Osisko Mining transaction Goldcorp would have a preeminent growth profile among its peers over the next couple of years. Furthermore, Goldcorp has disposed its holding in the Marigold mine, jointly owned with Barrick Gold (ABX). Goldcorp presumes that costs will decrease following this divestment and will inform the market once the deal is closed in April. Return to Shareholders and My Take Goldcorp remains dedicated to returning capital to its shareholders, leveraging a strong balance sheet, and solid cash flows. The company paid $486 million in dividends in 2013. This resulted in the company paying higher dividends as a percentage of its operating cash flow in comparison to its industry peers as shown in the chart below. Source: January 2014 Goldcorp Offer For Osisko Presentation Although analysts are forecasting a weak outlook for gold prices, the company has enhanced its strengths to mitigate the impact of adverse declining gold prices in FY 2014. Volume and price are the two major drivers for revenue earned by a company and Goldcorp will focus on the former in the coming years as the latter will show weak performance. The company's strategic moves and investments during the previous years will boost its production in FY 2014. Furthermore, the company is effectively reducing its costs by removing inefficiencies through strategic and operational initiatives. This will enhance the company's financial performance and position in FY 2014 resulting in gains for investors. Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Business relationship disclosure: The article has been written by a Blackstone Equity Research research analyst. Blackstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Blackstone Equity Research has no business relationship with any company whose stock is mentioned in this article.  |
| <b>Gold Price</b> Rebound Driven by Big Futures Buying - The Market Oracle Posted: 14 Mar 2014 01:50 PM PDT By: Zeal_LLC
From a pure fundamental supply-and-demand standpoint, gold's crushing losses last year were solely attributable to record gold-ETF selling by stock traders. The World Gold Council's comprehensive 2013 data showed that global gold-ETF outflows from epic share selling was actually a third greater than the total worldwide drop in gold demand! Without those extreme gold-ETF liquidations, gold wouldn't have plunged. Thankfully stock traders are just starting to buy gold-ETF shares again, resulting in capital inflows from the stock markets to gold for the first time in over a year. This critical mean reversion of investor interest in gold has barely even begun. So far, the flagship American GLD gold ETF has only recovered 1/25th of its bullion hemorrhaged in 13 months ending in January! Investors are driving this new gold-ETF holdings recovery. But a major secondary factor in gold suffering its worst loss in a third of a century last year was record futures selling. In the first half of 2013, American futures speculators dumped gold at blistering sustained rates. Provocatively as soon as their outsized selling peaked mid-year, gold prices stabilized even though the heavy gold-ETF liquidations continued. Futures trading dominates global gold-price action! There are multiple reasons for this. While gold trades universally in physical form, the actual prices vary slightly. The American gold-futures market provides one centralized price quotation that the rest of the markets can cue off. Actual gold bullion is costly and cumbersome to trade, but futures allow instant leveraged gold-price exposure to large hedgers and speculators. And gold futures have been around for decades. American gold futures started trading in late 1974, when gold ownership finally became legal again for Americans after being banned for four decades by a Democratic president. Meanwhile GLD wasn't born until late 2004, three decades after US gold futures started trading. So from a real-time-price and trader-sentiment perspective, American gold futures remain the only game in town. They truly are the gold price. So just as extreme gold-futures selling slaughtered the gold price in the first half of 2013, heavy gold-futures buying is lifting it this year. The implications of this critical shift are very bullish. Based on multi-year averages, this gold-futures buying is likely only half done at best. As futures buying continues to push gold higher, more and more investors will be enticed back to strengthen and amplify gold's new upleg. It's important to remember that futures are a zero-sum game. Every futures contract has one trader on the long side and another on the short side. The former is betting the underlying price will rise, and the latter that it will fall. Every dollar won by the winner is a direct dollar loss for the loser. Because of this core structure, the total number of longs and shorts outstanding in gold futures are always perfectly equal. But there are two distinct groups of futures traders, hedgers and speculators. Hedgers actually produce or consume the underlying commodity, so they simply use futures to lock in their future selling or buying prices to minimize market risks on their businesses. But speculators trade futures solely in the hunt for profits, they have no commercial dealings in gold. Their highly-variable buying and selling drives the gold price. Every week the main US futures regulator releases a great report called the Commitments of Traders that breaks down the futures positions held by both hedgers and speculators. The charts in this essay are built from that CoT data, revealing how American futures speculators are betting on gold. And they have been buying it aggressively, which is why the gold price has surged so nicely in the past few months. This chart may look complex, but it's quite simple. The green line shows the number of gold contracts that American futures speculators hold the long side of on a weekly basis. These are leveraged bets the gold price is going to rise, so the higher this metric the more bullish traders collectively are on gold. And the red line shows their bets on the short side, where higher numbers mean they are more bearish as a herd. In order to grasp the implications of the big gold-futures buying this year, understanding the context of the big gold-futures selling last year is essential. Gold plunged 26.4% in the first half of last year, in three distinct selloffs that all had major futures-selling components. Last February, it all started when gold fell on a futures bear raid while most Asian traders were away for week-long Lunar New Year celebrations. American speculators triggered this 6.7% 2-week decline by aggressively selling short gold futures. They effectively borrowed gold from other traders, sold it, and then hoped to buy it back cheaper later to repay their debt after its price had fallen. Speculators' total short-side bets on gold surged about 50k contracts in that time! This is truly a vast amount, as each futures contract controls 100 troy ounces of gold. The equivalent of 5m ounces of gold hitting the markets in a couple weeks, or 155.5 metric tons, was brutal. By that point in 2013, the total gold-bullion outflows from differential GLD-share selling was just 51.6t over 7 weeks. This pushed gold down near critical multi-year support at $1550, setting it up for April's shocking panic-like plunge. Once that technical line in the sand crumbled, all hell broke loose. As $1550 failed in mid-April, gold plummeted 13.8% in just 2 trading days! Gold hadn't seen anything remotely close to that for three decades, it was crazy. That critical-support break triggered stop losses on speculators' long gold-futures contracts, so they were forced to liquidate. This sparked margin calls on other traders, spawning a vicious circle of selling. Unfortunately the weekly CoT data masks this anomaly. The CoT reports are current to each Tuesday's close. Gold's panic-like plummet in mid-April happened on a Friday and Monday, right in the middle of a CoT week. While many traders were getting stopped out of long contracts, many other traders were buying them aggressively since gold's selloff was so extreme. So despite the minor weekly CoT changes, there was massive volume and churn within that week. That event was so scary that it galvanized futures speculators into a hyper-bearish outlook. Just like at all extremes, they assumed that anomaly was the start of a new trend that would persist for some time. This led them to continue dumping gold futures relentlessly, making their bet a self-fulfilling prophecy. Between late April just after that plummet and early July, speculators fled gold futures at an unprecedented rate. You can see this on the chart, the falling green line showing long positions being sold while the rising red one shows short bets growing. In futures trading, the price impact of selling an existing long position and selling to create a new short position is identical. The shorting accelerated as gold plunged again in June after Ben Bernanke laid out the Fed's best-case timeline for slowing its QE3 debt monetizations. 2013 was as far from a normal year in gold as you can get. Not only was it gold's worst year in nearly a third of a century, the second quarter was gold's worst quarter in an astounding 93 years! Epic gold selloffs like we witnessed last April and June simply don't happen, they are exceedingly rare. So there was no doubt that both futures speculators' extremely-bearish psychology and resulting bets weren't normal. As I was trying to figure out just how wildly outlying all this was in the middle of last year, I needed some baseline for normal gold markets. I decided to simply look at their post-stock-panic years before 2013, the 2009-to-2012 era, for that comparison. As the next chart shows in a little bit, both speculators' total long and short contracts held in gold futures had radically different averages over that secular span. The total deviation of both speculators' gold-futures longs and shorts from their 2009-to-2012 averages is represented by the yellow line above. By early July this critical metric had ballooned over 204k contracts. This meant American futures traders had sold the equivalent of 20.4m ounces of gold that they would normally hold, or 634.8 metric tons! This dwarfed GLD's year-to-date liquidation of 411.1t. The sheer magnitude of this first-half-of-2013 gold-futures selling defies belief. The World Gold Council reports all the world's mines supplied 2969t of gold in all of 2013. Since gold is produced at a constant rate, halving that yields 1484t in the first half. So American speculators' futures selling alone was so great in that span that it was like a 43% boost in mined supply! No wonder gold wilted under such an onslaught. But the great thing about futures and markets in general is extremes never last. Eventually after anything is sold too long, bearishness peaks and the anomalous selling burns itself out. So there was no doubt that American speculators would have to start buying gold futures again soon to reverse these hyper-bearish bets. On the short side in particular, it was mandatory. Those record shorts had to be covered! Despite their sophistication, gold-futures traders are human just like the rest of us. They too suffer from groupthink and herd mentality, getting too greedy and bullish when prices are already too high and too scared and bearish when prices are already too low. Historically, the aggregate speculators' gold-futures positions are actually strong contrarian indicators. Their low longs and high shorts predicted an imminent reversal. Indeed in July and August the speculators started aggressively covering their shorts, buying about 75k contracts or 233.3t of gold. This drove a sharp 18.2% 2-month gold rally, but unfortunately it fizzled out. Major new uplegs are always born with widespread short covering, as speculators buying to close their shorts at profits are often the only buyers around near extreme lows at peak despair. But their buying is finite. An upleg can't continue unless the upside price action initially sparked by short covering leads to enough bullish psychology to bring in other buyers. First futures speculators need to start adding new long-side bets, and then investors must gradually return to take over the capital-inflows lead. While there were encouraging signs of both gold-futures buying and gold-ETF buying, it soon ran out of steam. So futures speculators resumed shorting gold with a vengeance in November, as they continued to whittle down their long-side bets. By early December, the total deviation of spec long and short contracts from their 2009-to-2012 averages was back up near 201k! But just as this extreme anomaly proved unsustainable in early July, it was no more so in early December. Futures selling was simply exhausted. Provocatively for most of 2013, futures speculators feared nothing more than the Fed slowing its QE3 money printing to buy bonds. But when the rumor became fact and the QE3 taper arrived by surprise in December, gold only slumped to modest new lows. The American futures speculators didn't add to their high short positions, and they actually started buying longs again! Thus gold started to reverse higher. In January and February the speculators' short covering accelerated, they have bought back over 62k contracts (the equivalent of 194.5t of gold) since early December. Once again this major short covering has birthed what is likely to grow into a major upleg. But even more encouraging, they have also started to buy on the long side in a major way for the first time since last year's carnage. This is a super-bullish omen! Futures contracts have expiration dates, so speculators legally have to buy to cover their shorts to effectively repay their borrowed gold in a matter of months after selling it short. But they have no similar obligation to buy on the long side. So new long-side buying reflects a genuine shift in their collective sentiment away from the extreme bearishness that crushed gold in early 2013. And it feeds on itself. The more futures contracts speculators buy, the higher the gold price rallies. This brings in even more buyers, both in the futures realm initially and later in the far-more-important investment realm. It also puts tremendous pressure on the remaining speculators with short positions to buy back their bleeding bets to stem their mounting losses. And incredibly, this highly-likely futures buying is only half over! Once again that yellow data series shows the total deviation in speculators' gold-futures long and short contracts from their respective 2009-to-2012 averages in normal markets. This deviation peaked at 204.1k contracts in early July, and again at 200.8k in early December. All this gold that was sold had to be repurchased, driving gold higher, to return to market normalcy. As of the latest CoT report, it is still at 102.0k! Gold has run 15.0% higher in the past several months or so almost solely on American futures buying. While stock-market capital has just started returning to gold via GLD, that is just 23.1t so far compared to 317.6t of futures buying. And these futures speculators still need to buy another 102.0k contracts, or 317.2t more gold, merely to mean revert to their secular-average levels of bets in normal market conditions! This final chart extends this same CoT data back to 2008, to show those critical long-term averages. And the word average is key. It's certainly not like speculators' long-side gold-futures bets have to hit new record highs, or their short-side ones have to fall to zero. Between 2009 and 2012, before 2013's craziness, speculators averaged 288.5k long gold contracts and 65.4k short ones on a weekly basis per the CoTs. As of the latest CoT report, speculators' longs were only back up to 208.6k contracts. This is still 79.9k, or the equivalent of 248.6t of gold, below their long-term post-panic average. By mid-December 2013, these bullish bets on gold had fallen to their lowest level in 5 years, since the also extreme and short-lived anomaly of 2008's stock panic. Just take a look at what speculator longs did after that crazy event! They rocketed dramatically higher over the subsequent year or so, catapulting the gold price 54% higher and paving the way psychologically for investors to return en masse. This is all but certain to happen again after today's extreme, as that's just the way mean reversions out of extremes work universally in the financial markets. Once buying after extreme selling starts, it takes a long time for it to run its course. There is less gold-buying fuel left on the short side, with speculators total shorts now at 87.4k contracts. This is only 22.1k or 68.6t above their pre-2013 post-panic average. Still, that certainly isn't a trivial amount of gold. Most short covering happens early on, before long-side buying. Back in early July, speculators' total shorts hit 178.9k contracts! That was their highest level in at least 14.5 years, if not ever. Another 102k contracts of gold-futures buying, as much as has already happened, is bullish enough for gold. But one of the greatest things about mean reversions is they seldom merely return to averages after hitting extremes. They nearly always overshoot to the opposite side! Like a pendulum pulled too far to one side, the momentum built in the reversion is so strong that the pendulum can't just stop mid-arc. So there is nearly a certainty that we are going to see way more than another 102k contracts or 317t of gold-futures buying by speculators. The odds are overwhelming that their total longs will not stop mid-arc at their 288.5k 2009-to-2012 average, but soar well beyond that up towards 375k or so like after the stock panic. And their shorts are likely to fall far below their 65.4k average, likely challenging 40k again. Run these numbers, and we're looking at potentially 214k contracts of gold-futures buying or 665 metric tons in the next year or so! That much futures buying along with the investment buying the resulting gold upleg will create should easily push gold back up over $1800 again, it not much higher. Mean reversions out of extremes are the most powerful trends in all the markets, incredible profit opportunities. At Zeal we've been riding this one since its birth. As battle-forged contrarians, we've been brave when others were afraid. We've been aggressively buying dirt-cheap gold and silver stocks with outstanding fundamentals, and advising our subscribers to do the same. We're all already sitting on big unrealized gains (up to +120% since November) that will grow far larger as gold's recovery upleg continues to run. You ought to enjoy the profitable fruits of our hard work! We publish acclaimed weekly and monthly newsletters for contrarians who like to buy low and sell high. They draw on our decades of hard-won experience, knowledge, wisdom, and ongoing research to explain what's going on in the markets, why, and how to profit from it with specific trades. Since 2001, all 664 stock trades recommended in our newsletters have averaged stellar annualized realized gains of +25.7%! Join us today for just $10 an issue, a steal. The bottom line is big gold-futures buying has fueled this year's strong gold rally. And it wasn't just short covering like last summer, but the first major new long-side buying since last year's carnage as well. This greatly increases the odds that we are witnessing the birth of a major new mean-reversion upleg in gold. And incredibly, even to mean revert to average levels this futures buying is only half done so far. But mean reversions out of market extremes never simply stop at averages, they overshoot in an often dramatic fashion. So there is likely a lot more futures gold buying coming than merely a return to normalcy would suggest. As this continues to relentlessly push gold higher, more and more investors with their far-larger pools of capital will return to take the baton. And a massive upleg will be the ultimate result. Adam Hamilton, CPA So how can you profit from this information? We publish an acclaimed monthly newsletter, Zeal Intelligence , that details exactly what we are doing in terms of actual stock and options trading based on all the lessons we have learned in our market research. Please consider joining us each month for tactical trading details and more in our premium Zeal Intelligence service at … www.zealllc.com/subscribe.htm Questions for Adam? I would be more than happy to address them through my private consulting business. Please visit www.zealllc.com/adam.htm for more information. Thoughts, comments, or flames? Fire away at zelotes@zealllc.com . Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I will read all messages though and really appreciate your feedback! Copyright 2000 - 2014 Zeal Research ( www.ZealLLC.com ) © 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication. |
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Gold's strong rebound upleg this year has been driven by big gold-futures buying. After abandoning gold last year, American futures speculators are returning to the yellow metal in droves. These capital inflows are a very bullish harbinger, as major futures buying is the primary fuel for young gold uplegs before investors return to take the baton. And this big gold-futures buying is likely less than half done!
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